Full-text SSRN paper:
Bigtechs and the Emergence of New Systemically Important Financial Institutions: Lessons from the Chinese Experience (1)
By Christine Meng Lu Wang and Douglas W. Arner
(Available at SSRN: Read Now)
Over the past two decades, the emergence of giant technology firms (Bigtechs) has disrupted the traditional way that financial markets operate. These technology giants have leveraged network effects and extensive customer bases to expand into the financial sector and rapidly achieve economies of scale and scope. The expansion of Bigtechs into finance has reinforced the pre-existing trends of digitalization and datafication, which has evolved into a new era of the platformization of finance.
With a substantial presence in financial markets, the development of digital finance platforms has enormous potential for enhancing financial inclusion and sustainable development.
Despite these benefits, there are also many issues and risks in relation to their involvement in financial services, such as new “too-big-to-fail” and “too-connected-to-fail” problems and the emergence of new systemically important financial institutions (SIFIs).
In this context, the question is how policymakers and regulators, along with industry and consumers, can effectively leverage the benefits of the platformization of finance while mitigating its risks and negative impacts.
This paper focuses on the experience and lessons learned from China, in particular, as it has been a pioneer in the platformization of finance.
As the potential problems arising from Bigtechs’ market dominance and economies of scale have become increasingly prominent, they have become a target of the Chinese government to wage a multi-pronged response, particularly from the second half of 2020.
In the context of digital finance, risks involved in platform-based and highly interconnected financial activities are addressed by examining multiple areas of law, including finance, competition and antitrust, data protection and cybersecurity.
While China has made great efforts to mitigate negative impacts of the platformization of finance, the broad cross-sectoral and rapidly evolving nature of Bigtech businesses requires a reconsideration of the complex interaction between different government policies and regulatory objectives.
Based on the lessons from China’s regulatory experience, this paper frames a number of strategies and recommendations for other jurisdictions that are exploring ways to regulate the emergence of the platformization of finance.
First, due to the rapidly evolving nature of Bigtech businesses, it is important to develop regulatory mechanisms that allow for timely review and adaptation to facilitate understanding of innovative financial services before risk events occur.
Second, the exclusive control of customer data by Bigtechs is likely to undermine competition in financial markets, thus requiring effective data sharing mechanisms, such as Open Finance initiatives, to break their data monopolies.
Furthermore, given the network effects and economics of scale, digital finance platforms have the feature of being systemically important. There is a need for both activity-based and entity-based regulations to address risks involved in the interconnected financial businesses of the new SIFIs.
(1) Wang, Christine Meng Lu and Arner, Douglas W., Bigtechs and the Emergence of New Systemically Important Financial Institutions: Lessons from the Chinese Experience (July 10, 2024). Available at SSRN: https://ssrn.com/abstract=4890458 or http://dx.doi.org/10.2139/ssrn.4890458
(2) Related read: Fintech-Bank Partnership in China’s Credit Market: Models, Risks and Regulatory Responses ((Robin) Hui Huang and Christine Meng Lu Wang)
(3) Related read: Regulating a Revolution: From Regulatory Sandboxes to Smart Regulation (Dirk A. Zetzsche, Ross P. Buckley, Douglas W. Arner, and Janos Nathan Barberis)
(4) Related read: FinTech, RegTech and the Reconceptualization of Financial Regulation (Douglas W. Arner, Janos Nathan Barberis, and Ross P. Buckley)
(5) Related read: FinTech: Finance, Technology and Regulation
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